It's a good time to be an Internet giant

Why acquisitions will abound in the coming months as big boys eye humbled mid-stage startups.

Private company valuations are down, no one else has cash, and the decade’s earlier affluence produced a cornucopia of competing startups. Turns out the Web 2.0 years served to fatten the herd for the slaughter that will be 2009 and 2010. Microsoft, Cisco, Amazon, eBay, Google and the like are ready for a big, reasonably priced dinner.

The large-cap tech companies have faired well relative to other sectors of the economy, at a time when many startups are facing nuclear winter. In January, Michael Montgomery, who advises many of the Big Media acquisitions including Disney’s Club Penguin purchase, told me the large corporations were hungry for acquisitions but were waiting a few months for valuations to come down. Several recent, less-than stellar exits including MySpace’s purchase of iLike for an underwhelming $20 million last month, indicate that egos may have deflated enough.

It’s true that the Giants have had to tighten their belts as well, but this could actually increase M&A, since R&D budgets have been slashed and buying innovation in a fire sale is cheaper than building it. We’ve even seen flat-out talent grabs like Facebook’s purchase of FriendFeed. Apparently it’s cheaper to buy a company for its workforce than hire new blood through the HR department.

Slowing markets also means that big companies have to turn elsewhere for growth. Tapping into location-based mobile technologies, online consumer tools and other emerging sectors might be a better bet than pushing the same old products in a depressed economy.

While the economy will probably bounce back soon, the venture-capital world will not. Most project the industry will shrink to about half its size, and VC firms are focusing on their later-stage, exit-ready companies, and new younger scrappier seedlings, leaving the mid-stage companies a choice between extinction or bargain sales.

While news could be slow in the mid-recession months, it’s seems we’ll be in for some rich deal flow shortly. The Giants are eyeing the menu, and the feast is just getting started.